Keep the Process Natural

Forced Competitions Don’t Fit Defense Market

Feb. 24, 2013 - 04:11PM
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The Obama administration came to office determined to improve the defense acquisition process or, as they put it, “to do more without more.”

Beginning in 2010 with its Better Buying Power (BBP) initiative, the Pentagon undertook a concerted effort to improve the efficiency of the acquisition system and, in particular, reduce the cost of defense goods and services. A central feature of BBP was the promotion of increased competition among private-sector providers to improve outcomes and lower prices. BBP required greater use of firm fixed price (FFP) instead of traditional cost-plus contracts.

Unfortunately, some program managers thought this suggestion was the equivalent of a religious fatwa and started issuing FFP contracts regardless of the type of work involved. In addition, the drive to increase competition led to an explosion of so-called lowest price technical acceptable contracts and a tendency toward shorter contract performance periods with more frequent recompetes.

Now, the Defense Department’s love affair with competition appears to be waning, albeit slowly. While still acclaiming the virtues of competition, the recently announced revision to BBP, dubbed 2.0, makes it clear that a more nuanced definition of best value is required in competitive contracting and that quality and past performance had to be considered.

What is the real story on competition as a driver for improved performance and lower cost? When it is good, it can be very, very good. But when it is bad, it is awful. There are cases where DoD’s decision to promote competition seems to have worked, reducing unit costs and improving performance. Many involved standing up a second source to produce an already mature system (AIM 7 and 9, TOW, Hellfire and Tomahawk missiles).

The one example that all competition advocates point to is the so-called Great Engine War, in which Pratt & Whitney and General Electriccompeted to provide their own engines for F-15s and F-16s.

One of the most effective forms of government-promoted competition is the Government Services Agency’s (GSA) system of schedules. These are long-term, governmentwide contracts with multiple commercial firms accessible by federal, state and local government agencies. Special Operations Command has availed itself of the GSA system to access commercial vendors for its Survival, Support and Equipment Systems program.

Indefinite delivery/indefinite quantity (IDIQ) contracts with multiple winners, such as the Defense Logistics Agency’s Tailored Logistics Support Program and the Navy’s SeaPort-Enhanced, can ensure competition based on both quality and cost at the task order level.

But there are other cases where the rigid pursuit of competition has led to higher costs and poor outcomes. Studies by the Rand Corp. and the Center for Strategic and Budgetary Assessments have concluded there are many instances, such as when nonrecurring investments are large, in which competition can boost acquisition costs.

For example, the majority of studies concluded that competing production of engines for the new F-35 Joint Strike Fighter would not only require up to $4 billion in additional nonrecurring costs for a second source, but because the two engines would be different, additional billions in life cycle expenditures. The Pentagon decided that these costs would outweigh projected savings from splitting the engine buy between two providers.

There is a clear difference between what I would call natural competition, when companies have enough information, skill and capacity to make credible, sustainable bids and are allowed the time to recoup costs, and forced competition, which is artificially constructed based on policy desiderata.

For major defense system procurement, only a few companies can meet the standards for a natural competition. Even in the commercial world, natural competition tends to take place most often at the component and subsystem levels.

Forced competitions can be defined as those where qualified alternate sources do not exist or when periods of performance on contracts are reduced to less than an economically sensible period. When IDIQ contracts require winners to compete for every task order, including those they are not qualified to perform, this, too, is a forced competition. The results generally are higher costs to government and the private sector.

Forced competitions ignore the value of incumbency with respect to past performance, acquired knowledge, learning curve and trust between the parties.

DoD needs to exercise great caution in its drive to increase competitive contracting in an environment colored by a continuing resolution and sequestration. The acquisition system needs to take a nuanced approach, one that promotes natural but eschews forced competition.

The last word on the place of competition in DoD acquisition was provided by Jacques Gansler, the former undersecretary of defense for acquisition, technology and logistics: “Competition, for its own sake, or of the wrong form, is expensive and ineffective — so arbitrarily mandating it is wrong; but ‘smart competition’ (where properly applied — including even the ‘credible threat’ of applying it) will have huge payoffs (from the incentives created) in higher quality, better performance and reduced costs — so it must be fully utilized.”

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By Daniel Gouré, vice president of The Lexington Institute, Arlington, Va.